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The Annals of Regional Science

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Published in: The Annals of Regional Science 3/2022

06-01-2022 | Original Paper

Fiscal decentralization, regional disparity, and the role of corruption

Authors: Nupur Nirola, Sohini Sahu, Atrayee Choudhury

Published in: The Annals of Regional Science | Issue 3/2022

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Abstract

In this study, we examine how efforts taken by states to combat corruption act as a mediator in the relationship between fiscal decentralization and regional income disparities. Fiscal decentralization may affect regional disparities via access to funding, but corruption could limit the ability to efficiently transfer fiscal resources. India is one of the most decentralized nations of the world and also exhibits high regional disparities. Under this scenario, we estimate whether institutions, in the form of anti-corruption efforts by the states, interact with fiscal decentralization and affect divergence across states of India. We find that fiscal decentralization reduces the disparity across states, and the effect of fiscal decentralization is stronger under efforts to control corruption by state vigilance bodies. The results are robust across different specifications of fiscal decentralization and alternate estimation methods accounting for endogeneity. From the policy perspective, in order to harness the potential benefits of decentralization to reduce regional income disparities, governments should focus on improving the quality of institutions through control on corruption at the sub-national level.
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Appendix
Available only for authorised users
Footnotes
1
The National Development Council of India has characterized the states into special category states (SCS) and non-special category states (NSCS). Special category states include the following features:1. hilly and difficult terrain, 2. low population density and/or sizeable share of tribal population, 3. strategic location along borders with neighboring countries, 4. economic and infrastructural backwardness, and 5. non-viable nature of state finances. Till now, 11 states are part of SCS (Arunachal Pradesh, Himachal Pradesh, Manipur, Meghalaya, Mizoram, Sikkim, Tripura, Jammu and Kashmir, Assam, and Nagaland). The NSCS are Andhra Pradesh, Bihar, Chhattisgarh Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal. Since the special category states get preference in terms of financial transfers from the Central government, only non-special category states have been included in our analysis.
 
2
These states are Andhra Pradesh, Bihar, Chhattisgarh, Goa, Gujarat, Haryana, Jharkhand, Karnataka, Kerala, Madhya Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh, Uttarakhand, and West Bengal.
 
3
See studies Chaudhuri, K., & Dasgupta, S. (2006), Dash, B. B., & Raja, A. V. (2012), Dash, B. B. (2014), Ganaie, A. A. et al. (2018), Bhat S.A. et al. (2018).
 
4
General government includes the central government, the state government, and the local government.
 
6
We thank an anonymous referee who highlighted this feature related to corruption control efforts.
 
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Metadata
Title
Fiscal decentralization, regional disparity, and the role of corruption
Authors
Nupur Nirola
Sohini Sahu
Atrayee Choudhury
Publication date
06-01-2022
Publisher
Springer Berlin Heidelberg
Published in
The Annals of Regional Science / Issue 3/2022
Print ISSN: 0570-1864
Electronic ISSN: 1432-0592
DOI
https://doi.org/10.1007/s00168-021-01102-w

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